Human Beings , are, for the most part, an optimistic bunch. They are resilient and resourceful and have a natural instinct for survival. These are going to be important tools when the next economic crisis hits.
I know by now many that read my blog feel all I preach is doom and gloom. That I write a blog that tries to direct my followers in how to prepare for the next “black swan” event with an ad nauseam Henny Penny like
droning and repetitious message of how the “sky is falling” This blog entry will be no different when it comes to the message, but will be a more detailed and succinct explanation for why I feel the time is getting near.
The global economy is in the worst state it has ever been in. It has created a global set of asset bubbles that the entire world economy now trapped in one GIANT DEBT bubble. The Global Financial Crisis of 2007/08 was triggered by the bursting of the real estate bubble in the USA. A debt driven, leverage driven bubble that brought down Lehman Brothers and would have seen the collapse of many more banks in the USA had the government not determined them “Too Big To Fail”.
It seems such a long time ago but the effects of that crisis are still dominating economic policy and in particular monetary policy settings by all the Central Banks around the world. The ’08 Crisis that hit was a sign that the economy was in poor shape, that it needed to restructure, redirect finance from debt to savings, consumption to production. In short the economy needed a recession.
Rather than allowing this to happen Central banks around the world have embarked on one of the greatest economic gambles in recorded history. Quantitative Easing and easy monetary policy including the lowest set of global interest rates ever seen have been implemented in an attempt to import inflation, target economic growth and boost economic growth. In the USA this aggressive QE program and low interest rate policy has done very little to curb the unemployment problem, in fact the unemployment rate ticked up 0.1% on the latest figures. The latest jobs report had many media spin merchants heralding the economy was strengthening on a better than expected jobs report which indicated that 204,000 new jobs had been created beating the miserly expectations of 130,000.
It seems that the media was in such a delirious state that they spun themselves into a dizzy haze of confusion. Sure 204,000 jobs were created but as I stated earlier, the unemployment rate went up. Once again, the
devil is in the detail with this jobs report. The jobs created are predominately in the service sector and the retail sector, the boost coming as businesses prepare for the holiday season rush. The jobs created
are temporary “anticipation” jobs that will disappear as soon as the Christmas sales are over. Within the 204,000 jobs created, and judging by the fact that the overall unemployment number went up, it can be assumed that many of these part time jobs are being filled as second or even third jobs by people that are currently part of the existing work force. My assumption above comes from the following data released by the BLS which stated “The civilian labor force was down by 720,000 in October. The labor force participation rate fell by 0.4 percentage point to 62.8 percent over the month”.
The above figures show that while 204,000 new jobs were created, the labor participation rate fell by 720,000. With all this being said I am absolutely flabbergasted that this jobs report is being heralded as a strong one and a sign the USA economy is in recovery. Just for a start this participation rate of 62.8% is the lowest labor participation rate recorded since August 1978. In considering this date one must understand that it was around this time that women were beginning to enter the workforce and so there was an increasing rate of people searching for a job. This is a natural part of the explanation of why the participation rate was so low during this period. Put simply the labor force demographic was changing at a faster rate than jobs could be created.
Below is a historical chart that illustrates the sharp decline. Note the shaded areas are recorded periods of recession.
The adverse effects of a declining workforce participation rate are numerous. The effects impact on a broad range of economic, socioeconomic, social and political conditions. To begin with, the economy is adversely
affected simply by the fact that the tax base will be reduced. The 700,000 people now not actively seeking work diminishes the amount of potential people that will be earning an income and in turn paying taxes
on that income. Furthermore those not working may also require Government subsidies such as food stamps or welfare just to survive. Social impacts for the hard core or long term unemployed may include
depression, a loss of self worth. It will also see a drain on skilled workers as long term unemployed are not in a position to keep pace with the dynamic global economy and technological advances. This makes
retraining necessary when the economic conditions improve. Political climate can be impacted as the unemployed or underemployed join in protests and movements driven by a feeling of inequality and
exploitation. Occupy Wall St was a prime example of what I feel will be an ever increasing global trend as the gap between the “haves and have nots” is widened.
With a deteriorating participation rate and employment outlook the psychological and emotional drivers of the economy turn negative. The velocity of money which is a behaviorally driven phenomenon declines
driven by the negative feeling that engulfs the market. Central banks right now are attempting to fight this negativity off with endless rounds of QE and easy monetary policy designed to create a “wealth
effect” by inflating asset prices. The boom in the property market in Australia right now is an interest rate inflated property market bubble that will soon burst.
Australia is set to follow in the footsteps of the USA. There is no doubt in my mind that the property market in Australia could fall between 15 and 35% in the medium term. This property market surge has been driven by the lowest interest rates in Australian recorded history. The fact is people do not care about HOW MUCH they are paying for the home they buy, they care more about HOW MUCH the repayments are. Speculators have rushed into the property market as the Reserve Bank lowered interest rates. The Federal Governments first home buyers grant has fueled the property market fire driving it to unsustainable levels.
As the property market goes up the Keynesian “wealth effect” kicks into action. People that see their homes go from their purchase price of $500,000 one year to $600,000 the next feel they are $100,000 better off
because the value of their home has increased. This triggers more debt as some borrow against their increasing home value to go on a vacation, buy a car or remodel the home.
While this so called “wealth effect” is aimed at creating economic growth and inflation through consumption and spending, what it really creates is a prolonged course of debt driven deflation. The “wealth effect” is based on flawed logic. Sure you get a period of asset price inflation like the Australian property market and the USA’s equity market, but those increases in asset prices are driven by an increase in leverage and debt.
One must be aware that if you buy a home for $500,000 and sell it for $600,000, there is still an increase in debt lumped on the economy of $100,000 for the person that has purchased the asset for the inflated price.
This misdirected increase in debt does nothing to grow an economy. What it really does is creates a bigger problem for those that get caught in the downward debt spiral when the economy needs to deleverage and reduce debt. Below is an article which highlights the point that even with the Federal Reserves $4 trillion worth of asset purchases so far, the trickle down contribution to GDP is a miserly 0.25%.
http://rt.com/usa/quantitative-easing-fed-official-610/
In many ways I feel we are heading for a “Minsky Moment” for the global economy. Investopedias definition of a 'Minsky Moment' is summarized below.
“When a market fails or falls into crisis after an extended period of
market speculation or unsustainable growth. A Minsky moment is based on
the idea that periods of speculation, if they last long enough, will
eventually lead to crises; the longer speculation occurs the worse the
crisis will be”
I believe the next global economic “Minsky Moment” will soon be upon us. It is a Federal Reserve and Central Bank policy induced crisis which will be almost impossible to escape. Each individual country has it’s own individual bubble or bubbles that are being inflated. Australia has a property bubble, the USA has a property bubble and an equities bubble. Canada and the UK both have property bubbles. The list goes on and on. The asset bubbles once popped will expose the underbelly of debt that lies beneath the surface. It will unravel with greater speed than in the last economic crisis and will expose the systemic problems associated with a debt driven global economy. With so much debt weighing the global economy down, most of which borrowed during this low interest rate environment, the global economy and the people it supports stay waiting. Some are aware of the dark clouds that are forming but sadly many are not. In my opinion the “Minsky Moment” is upon us, and when it hits it will be seen as the moment that brought about the Keynesian theory demise.
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